The financial world was thrown into chaos following the UK’s decision to leave the European Union on 23 June last year. The days that followed were spattered with speculation on how the unexpected vote would affect jobs, regulation and the global macro environment. By far, the biggest focal point for the financial ecosphere was - and remains to be - where banks with London-based EU hubs will move banking staff to ensure a presence is sustained in the European Union.
Straight off the bat, JP Morgan emerged stating the referendum could force it to move as many as 4,000 banking roles from London. An internal memo sent to employees immediately following the vote revealed changes to the bank’s European legal entity structure and the location of some roles would be severely affected.
“While these changes are not certain, we have to be prepared to comply with new laws as we serve our clients around the world,” the memo said.
It has been more than a year since the referendum and investment banks and financial services firms continue to make decisions on where to move previously London-based EU hubs. With Article 50 now triggered, new EU-based entities are being drawn up across Europe in capital cities like Paris, Amsterdam, Dublin and Frankfurt. It is important to note, not all of the moves have been confirmed as discussions with the European Central Bank, European financial regulatory authorities and those in the US continue and are ongoing.
Nevertheless, it is clear Frankfurt has come out on top as the destination of choice for a significant number of the world’s largest investment banks. Citigroup, Standard Chartered, Deutsche Bank, Morgan Stanley and Nomura are among those who will relocate their EU headquarters from London to the German capital. UBS and Goldman Sachs are also expected to make the same move.
Closer to home, Bank of America and Barclays have opted for Ireland’s capital as their new European Union headquarters. Dublin was immediately tipped to be a popular destination for financial services due to its short distance from London, regulatory framework, low tax rates and for the simple fact it is an English speaking country. In June this year, the head of international financial services at Ireland’s Industrial Development Authority, Kieran Donoghue, claimed in an interview with a UK national newspaper more than 10 London-based banks will move at least some of their operations to Dublin.
For others, Amsterdam has become the destination of choice. Financial services firms like Tradeweb and MarketAxess have both confirmed the establishment of new entities in the city. Tradeweb submitted its application with Dutch authorities to found a fully regulated entity in August, as it looked to continue to serve its global client base.
“Post-Brexit, for many investors, uninterrupted access to that liquidity requires an independent and fully functional regulated entity within the EU, and our Amsterdam office will be a new expression of our mission,” said Enrico Bruni, head of Europe and Asia at Tradeweb.
The Amsterdam office will act as the electronic trading hub for Tradeweb’s EU-based clients and the decision was made based on the regulatory environment and infrastructure. For MarketAxess, chief executive Rick McVey, told reporters the decision to opt for Amsterdam was driven by the ongoing uncertainty around a transitional period to ease the financial world into the UK’s departure from the EU.
“We’re hoping [no transition deal] is not the case but we’re preparing for the worst. MarketAxess means to be fully regulated and ready to go well ahead of Brexit,” he said.
The emergence of a new EU hub
Banks and financial services firms forced into restructuring their European footprints could find commercial benefits to relocating more business activity to the EU over time. Consolidating relationships and more solid collaboration between traders and salespeople while preserving in some cases a closer proximity to clients has its advantages.
Cities like Frankfurt, Paris and Dublin are now competing for business and working on attracting firms through the revision of labour laws, tax codes or supervisory powers. But the emergence of a new EU financial hub may not necessarily be driven by the banks’ choice of relocation.
“Should a new EU hub emerge, banks would be quick to re-orient their operations towards that location. But, for now, the industry is moving towards a less centralised structure, as each bank chooses their preferred location based on their existing legal entity structures and their own business profiles and priorities.
“Some are likely to spread their operations across a number of countries using a combination of branches and subsidiaries,” says Matt Austen, UK head of financial services at Oliver Wyman.
As the first batch of investment banks put their faith in Frankfurt, it is likely others will follow. Although this doesn’t mean the city will replace London as the EU’s financial hub. Research fellow at European economic think-tank Bruegel, Gregory Claeys, explains a lack of a hub and a shift towards a more decentralised European financial sector could have severe consequences not just for the UK, but also for the world.
“It’s unclear whether the network effect that made London the financial hub it is today is still as powerful. Perhaps with new technologies it will be easier for the financial sector to operate in a more decentralised way.
“A decentralised model will likely be negative for the sector. With aggregation you see greater efficiency and more innovations while reducing costs for the industry as a whole. Decentralisation would certainly lead to a loss for everyone,” Claeys says.
What about London?
Regardless of these possible scenarios, what happens to London?
Bankers in Britain appear to be pretty bullish when it comes to the issue. A report authored by TABB Group and Synechron late last year found the majority agree London will remain the financial centre of Europe, at least for the next five years. The poll of 80 financial services individuals working in capital markets found 72% of respondents in the UK remain positive on London’s financial position in Europe, although 78% agree Brexit will have an overall negative impact on the UK’s financial markets.
It’s hard to say at this point where London will stand once the divorce from the European Union is finalised. Negotiations are ongoing and have only just recently begun. Furthermore there are multiple outcomes of the negotiations, some of which could see the UK’s access the single market severely limited.
“Our analysis suggests that the impact on the financial services sector will vary dramatically with how much access to the EU is retained. In a high access scenario the disruption could be negligible. In a low access scenario the impact is likely to be much larger, and any resulting wider impact to the ecosystem could magnify losses,” Austen says.
Oliver Wyman research aimed at assessing the impact of Brexit on London suggests should the UK successfully negotiate passporting, equivalence rights and access to the Single Market, UK-based activity may be only slightly subdued. Revenues from EU-related activity would decline by approximately £2 billion with around 3-4,000 jobs at risk.
However, should the UK fall into a third-country status with the EU and lose equivalence the consequences are tipped to be far more severe. Revenues from EU-related activity in London would plummet by up to £20 billion and around 35,000 jobs would be at risk.
“With the European market set to become more fragmented and less profitable, banks will have difficult strategic trade-offs to make. Nonetheless, the primary focus must be to avoid a post-Brexit ‘cliff edge’ and this will require banks, policymakers, and regulators to all play a role,” Austen adds.
At the moment, the true impact of Brexit remains speculation but we can agree there’s one thing that is certain, the financial sector and the city of London may never be the same again.